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Chinese telecom faces $1.2 billion sanctions penalty for trading banned tech to Iran, North Korea

Thursday, March 9, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
March 9, 2017

The largest publicly-traded telecommunications manufacturer in China will pay the U.S. government up to a record $1.2 billion for knowingly giving restricted equipment to Iran and North Korea in violation of U.S. sanctions, a scheme blessed by top executives and kept afloat by a dedicated cover-up team.  

The historic penalty against China’s Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd., referred to as ZTE, for violating export control restrictions and sanctions rules, comes with a bevy of firsts for the U.S. Justice Department, U.S. Treasury’s Office of Foreign Assets Control (OFAC), and the U.S. Commerce Department.

This civil penalty is the largest ever imposed by Commerce’s Bureau of Industry Security (BIS) and, if the criminal plea is approved by a federal judge, the combined $1.2 billion in penalties, “would be the largest fine and forfeiture ever levied by the U.S. government in an export control case,” not involving a bank, according to penalty documents.  

“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports,” said Acting Assistant Attorney General for National Security Mary McCord.

The pending plea agreement “alleges that the highest levels of management within the company approved the scheme,” she said, in a statement. “ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty.”

In tandem, OFAC announced a $101 million penalty related to 251 violations of Iran sanctions rules for a “multi-year and systemic practice of using third-party companies to surreptitiously supply Iran with a substantial volume of U.S.-origin goods,” including controlled goods specifically highlighted by the Commerce Department. The total value of the violations was $39.6 million.

The action “marks OFAC’s largest settlement to date with a non-financial entity,” according to Treasury documents.

The plea agreement, which is contingent on the court’s approval, also requires ZTE to submit to a three-year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program.

As part of the deal, $300 million of the penalty will be suspended over a seven-year probationary period.

Trade sanctions skipping mirrors bank stripping

The actions described in settlement documents mirror many of the tactics used by banks over the past decade in what have been termed “stripping cases,” where institutions institutionalized and formalized procedures to erase wire information, allowing blacklisted countries to evade sanctions. In the largest settlement of its kind in 2014, BNP Paribas paid nearly $9 billion.

The plea agreement, which is contingent on the court’s approval, also requires ZTE to submit to a three-year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program.

ZTE relies on U.S. suppliers for 25 percent to 30 percent of its components, many of which are key to its goods. It purchases about $2.6 billion worth of components a year from U.S. firms, according to a company spokesman. Qualcomm, Microsoft and Intel are among its suppliers.

“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” ZTE Chief Executive Zhao Xianming said in a statement, according to Reuters.

Even with that mea culpa, the documents reveal a brazen and sophisticated scheme to grab restricted communications technologies, weave the materials into their own products, sell them to blacklisted regimes and then falsify documents, allowing access to tens of millions of dollars worth of sensitive U.S. items and capturing hundreds of millions of dollars in new contracts.

But what likely pushed the penalty figure to new heights is the lengths that company executives went to lie to U.S. authorities and even their own internal forensic auditors and consultants, in most instances employing “isolation” companies, simply another term for a shell company in an attempt to distance their name from direct dealings with Iran and North Korea.

U.S. investigators stated that although the illicit actions occurred from January 2010 to March 2016, ZTE instituted new, institutionalized procedures to “sanitize” dealings with designated countries after a 2012 Reuters story exposed their practices of putting U.S. equipment into products going to Iran.

One of the few ways to ferret out that U.S. items were even involved is to look for key terms of in actual packing slips, according to settlement documents.

“ZTE Corporation not only violated our export control laws but, once caught, shockingly resumed illegal shipments to Iran during the course of our investigation,” said U.S. Attorney John Parker for the Northern District of Texas, in a statment. “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.” 

Enter the special ‘sanitation’ committees

The extensive procedures were detailed in two ZTE corporate documents, one which indicated that ZTE reexported controlled items to sanctioned countries contrary to U.S. law and a second which described how ZTE planned and organized a scheme to “establish, control and use a series of ‘detached’ (i.e., shell) companies to illicitly reexport controlled items to Iran in violation of U.S. export control laws.”

In the documents, investigators stated that ZTE made “knowingly false and misleading representations and statements,” including that the company had previously stopped shipments to Iran as of March 2012, and was no longer violating U.S. export control laws. 

As part of the scheme to keep up that ruse, ZTE “affirmatively mislead the U.S. Government, by deleting and concealing documents and information from the outside counsel and forensic accounting firm that ZTE had retained with regard to the investigation.” 

This interference initiative included “forming and operating a 13-member ‘Contract Data Induction Team’ within ZTE between January and March 2016, that destroyed, removed, or sanitized all materials concerning transactions or other activities relating to ZTE’s Iran business that post-dated March 2012.”

As well, the group “deleted on a nightly basis all of the team’s emails to conceal the team’s activities; and required each of the team members to sign a non-disclosure agreement covering the ZTE transactions and activities the team was tasked with hiding.” 

Under the non-disclosure agreement, team members would be subject to a penalty of 1 million Renminbi, roughly $150,000.

The chicanery and subterfuge allowed ZTE to send 283 shipments of controlled items to the recalcitrant and unpredictable North Korea “with knowledge that such shipments violated” the Export Administration Regulations (EAR), Commerce said in its settlement documents.

Some of the shipped items included “dual use” technology that could be used for more than just telecommunications, including routers, computer processors, and servers controlled under U.S rules as part of national security and anti-terrorism countermeasures.

“We are putting the world on notice: the games are over,” said Secretary of Commerce Wilbur Ross. “Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences.

“The results of this investigation and the unprecedented penalty reflects ZTE’s egregious scheme to evade U.S. law and systematically mislead investigators,” Ross said.


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